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Rent-Seeking 101

Mike Munger, chair of Duke University’s political science department and a friend of Cato, has a great essay on the waste of political “rent-seeking,” the attempt to get taxpayer money channeled through government to your favored interest (whether hungry children, municipal governments, corporations, or private individuals).

Here’s an excerpt:

In my classes, I ask students to imagine an experiment that I call a Tullock lottery, after one of the inventors of the concept of rent-seeking, Gordon Tullock.

The lottery works as follows: I offer to auction off $100 to the student who bids the most. The catch is that each bidder must put the bid money in an envelope, and I keep all of the bid money no matter who wins.

So if you put $30 in an envelope and somebody else bids $31, you lose both the prize and the bid. When I run that game with students I can sometimes make $50 or more, even after paying off the prize. In politics, the secret to making money is to announce you are going to give money away.

Take a walk along K Street in Washington, DC. It is lined with tall buildings, full of fine offices and peopled by men and women with excellent educations and a real sense of ambition, a desire to make lots of money and achieve great things. What are those buildings, those people? They are nothing more than bids in the political version of a Tullock lottery. The cost of maintaining a D.C. office with a staff and lights and lobbying professionals is the offer to politicians. If someone else bids more and the firm doesn’t get that tax provision or defense bid or road system contract, it doesn’t get its bid back. The money is gone. It is thrown into the maw of bad political competition.

Who benefits from that system? Is it the contractors, all those companies and organizations with offices on K Street? Not really. Playing a rent-seeking game like that means those firms spend just about all they expect to win. It is true that some firms get large contracts and big checks, but all the players would be better off overall if they could avoid playing the game to begin with.

This is a large part of why I think Jonathan Chait is daffy for saying that Warren Buffett should dump some large fraction of his billions on “slick political operatives” on K Street. The competition for political rents is zero- and often negative-sum. The rent-seeking game has features of both a commons tragedy and an arms race — neither being a good model for a prosperous and peaceful society. But that’s what big-government types, left and right, are asking for when they insist on keeping government money and power on the table.

Chait is no doubt right that if his political tribe had more billionaire patrons, they could win more “auctions.” Unless the other tribe has even more motivated billionaire patrons, that is. He seems not to grasp that this a mug’s game — a low-grade civil war — flatly inconsistent with the general welfare. It’s a huge waste of financial and human resources. And once the game gets started, you often get sucked in, whether or not you’d like to, just to survive. Munger:

My students ask why anyone would play this sort of game. The answer is that the rules of our political system have created that destructive kind of political competition. When so much government money is available to the highest bidder, playing that lottery begins to look very enticing. The current Congress has, to say the least, failed to stem the rising tide of spending on domestic pork-barrel projects. Political competition run amok has increased spending nearly across the board. And sometimes, you have to bid just to keep from having money taken away from you through regulation.

I think once you really grasp the logic behind the tremendous loss of welfare through destructive political competition for rents, it becomes difficult to defend big, relatively unlimited government. Chait notoriously claimed that limited-government, market liberal types (i.e., Cato types) are evidence-immune ideologues, while statist liberals like him are just plain old empiricists, following the evidence where it leads. Well, Jon Chait, open-minded empiricist, I’d like to introduce you to my friend Mike Munger.